What is Proof-of-Work

Proof-of-Work (PoW) is the first method to validate blockchain transactions and has played a critical role in crypto history.

Decentralization was a key part of the original vision for cryptocurrencies. To accomplish that, there needed to be a way to confirm transactions without the involvement of financial institutions. The first solution to this challenge was called proof of work.

Proof of work (PoW) is a form of adding new blocks of transactions to a cryptocurrency’s blockchain. The work, in this case, is generating a hash (a long string of characters) that matches the target hash for the current block. The crypto miner who does this wins the right to add that block to the blockchain and receive rewards.

Cryptocurrency started with proof of work since it’s the consensus mechanism used by the first cryptocurrency, Bitcoin (CRYPTO:BTC). It’s well-known for its security but also for inefficiency and a heavy environmental impact.

By understanding proof of work, you’ll have a better understanding of the coins that use it. This can also help you choose where to put your money when investing in crypto. Keep reading for a full explanation of proof of work.

How the proof-of-work model works

The proof-of-work model is a consensus mechanism used to confirm and record cryptocurrency transactions.

Every cryptocurrency has a blockchain, which is a public ledger made up of blocks of transactions. With proof-of-work cryptocurrencies, each block of transactions has a specific hash. For the block to be confirmed, a crypto miner must generate a target hash that’s less than or equal to that of the block.

To accomplish this, miners use mining devices that quickly generate computations. The aim is to be the first miner with the target hash because that miner is the one who can update the blockchain and receive crypto rewards.

The reason proof of work in cryptocurrency works well is because finding the target hash is difficult but verifying it isn’t. The process is difficult enough to prevent the manipulation of transaction records. At the same time, once a target hash is found, it’s easy for other miners to check it.

Example of proof-of-work

When Bitcoin transactions occur, they go through a security verification and are grouped into a block to be mined. Bitcoin’s proof-of-work algorithm then generates a hash for the block. The algorithm Bitcoin uses is called SHA-256, and it always generates hashes with 64 characters.

Miners race to be the first to generate a target hash that’s below the block hash. The winner gets to add the latest block of transactions to Bitcoin’s blockchain. They also receive Bitcoin rewards in the form of newly minted coins and transaction fees. Bitcoin has a fixed maximum supply of 21 million coins, but, after that, miners will continue receiving transaction fees for their service.

The proof-of-work algorithm used by Bitcoin aims to add a new block every 10 minutes. To do that, it adjusts the difficulty of mining Bitcoin depending on how quickly miners are adding blocks. If mining is happening too quickly, the hash computations get harder. If it’s going too slowly, they get easier.

The existing problems of the proof-of-work model

  • High energy use: Bitcoin uses as much energy as all of Switzerland because of proof-of-work. And its energy use is increasing as more miners join the hunt for bitcoins, though some of this is powered by renewable energy.
  • 51% attacks: If one mining entity is able to accumulate 51% of Bitcoin’s mining hashrate, it can then flout the rules temporarily, double-spending coins and blocking transactions.
  • Mining centralization: Proof-of-work is all about creating a currency without one single entity in charge. That said, in practice the system is somewhat centralized, with just three mining pools controlling almost 50% of Bitcoin’s computational power. Developers are attempting to at least alleviate this issue, however.

Proof-of-Work vs. Proof-of-Stake

Proof of work and proof of stake are two different consensus mechanisms for cryptocurrency, but there are important differences between them.

Both methods validate incoming transactions and add them to a blockchain. With proof of stake, network participants are referred to as “validators” rather than miners. One important difference is that instead of solving math problems, validators lock up set amounts of cryptocurrency — their stake — in a smart contract on the blockchain.

In exchange for “staking” cryptocurrency, they get a chance to validate new transactions and earn a reward. But if they improperly validate bad or fraudulent data, they may lose some or all of their stake as a penalty.

Proof of stake makes it easier for more people to participate in blockchain systems as validators. There’s no need to buy expensive computing systems and consume massive amounts of electricity to stake crypto. All you need are coins.

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